Service Contract Pricing: Game Consoles:

Though not all electronics retailers sell them, video game consoles are a major part of the service contract industry. And because the top three systems now on the market are similarly priced, the differences in the pricing of the service contracts offered alongside them become all the more obvious.

Remember the Xbox 360? That video game platform cost Microsoft more than a billion dollars in warranty expenses. Today's game consoles are much more reliable, but they're frequently sold with service contracts attached. Some are also covered for accidental damage. And it adds up to a good amount of additional revenue, given that these contracts can add roughly 16% to the typical $300 purchase price.

Service Contract Administrators

Over the course of going through the game console offerings of these 14 retailers, we came across eight different service contract obligor/administrator/underwriter teams.
SquareTrade was the administrator at Abt Electronics, Amazon.com, B&H Photo, eBay, QVC, Sam's Club, Target, and Toys R Us Inc. Its underwriter at all but eBay, QVC, and Toys R Us was Starr Indemnity & Liability Co. At both QVC and Toys R Us, however, SquareTrade's underwriter was Continental Casualty Co., and at eBay it was CNA Warranty Services Inc. Both of these underwriters are units of CNA Financial Corp.

As in past weeks, we found that Amazon.com had a competitive mix of service contracts available from multiple administrator/underwriter teams, sometimes bidding against each other for attachment to the same product on the same page. This week, we found Asurion/The Warranty Group, SquareTrade/Starr Indemnity, and Warrantech/AmTrust selling game console service contracts on Amazon.com. We have not yet found another retailer that sells multiple different brands of service contracts side by side.

We also found numerous consumer electronics retailers which did not sell video game consoles, or did not sell service contracts for game consoles. Those that did not sell the consoles at all included Conn's, Crutchfield, and Office Depot. Those that sold the consoles but did not sell protection plans for them included BJ's Wholesale Club, Costco Wholesale, Groupon Inc., Kmart, Kohl's,
PC Richard, Sears, and Staples.

Unlike in past weeks, this time around we shopped for three specific products made by three different companies. At these 14 retailers, we shopped for the PlayStation 4 made by Sony Corp., the Xbox One made by Microsoft Corp., and the Wii U made by Nintendo Co. Ltd.

In all cases, we sought the package that contained the game console only, but since bundles with the games and sometimes even peripherals were so common, we looked for the bundle with the lowest price. Most of the merchandise ended up being around $300 per package, however, so the price of the product ended up not being much of a factor. Therefore, in Figure 1 we've carved up the products by brand.

Figure 1
Brand of Game Console Surveyed

We shopped only for new units -- no refurbished, used, open box, or no-box units. And we didn't include either sales tax or shipping costs in the price. In cases where the retailer offered models with more or less memory, we chose the one with the least memory, and hopefully a lower price. But we also chose a few ringers, such as a PlayStation 4 bundled with "Call of Duty: Black Ops 3" and a terabyte of disk space that was selling for $1,000 on eBay (SquareTrade offered a three-year plan for $130 and a four-year plan for $173).

Length of Coverage

In total, 80 pairs of products and service contracts were found. But unlike with most other consumer electronics products, many retailers offered only one service contract option per product. Some offered two, such as Amazon.com, B&H, and Micro Center, that differed in the number of years covered. And QVC offered customers a choice of two-year service contracts with or without accidental damage coverage. But for the most part, very few retailers offered as many choices for service contracts as they did for laptops, cameras, or televisions.

Perhaps because the retailers known for selling long-term service contracts were not among those selling game consoles, we found no five-year service contracts. That's not to say they don't exist, but they haven't been spotted in the wild. Readers who have seen them are encouraged to contact the editor.

Of the 80 product-protection plans that we did find, almost half were for three years, and very few were for either one or four years. The precise distribution of protection plans in terms of duration can be seen in Figure 2.

Figure 2
Length of Service Contracts Offered
(in years)

Differences in product warranty durations were a minor complications. The warranty on both the PlayStation and the Xbox were for one year, parts and labor, but the warranty on the Wii U console was for a year on parts cost and for only 90 days on labor cost. So it's possible that savvy Wii U customers would be buying one-year service contracts just in case they need a repair. And even Xbox and PlayStation customers could be talked into buying protection from perils not covered by their warranties, such as power surges and accidental damage, even for the first year.

But the heart of the market seems to be three-year coverage. We note, however, that only 40% of the contracts surveyed covered accidental damage. And the 60% that did not also did not make it easy to figure out that they did not. So we took the same exclusionary approach as we did with other products: if they did not say they covered drops and spills, we assumed they did not.

Nine of the 14 retailers did offer some plans that included accidental damage coverage. And they usually made that plain in the name of the plan: Accidental Geek Squad Protection, Accident Protection Plan, Electronics Accident Protection Plan, etc. The ones that did not offer ADH for game consoles were Abt Electronics, eBay, GameStop, Sam's Club, and Target. All but GameStop are SquareTrade clients.

Product & Service Contract Prices

The next metrics we collected were the prices of the game consoles and the service contracts. Even though most of the bundles were selling for $250 to $350, we were astonished to find the price of service contracts ranging all the way from $20 to $100, representing from 8% to 40% of the price of the product they're protecting.

In Figure 3 we're looking at the 29 product-protection pairs that offered either one or two years of coverage. Only Micro Center and newegg.com offered one-year plans, which would work to enhance the one-year product warranties of the game consoles with additional coverages. But the newegg.com plans did not include accidental damage coverage, while the Micro Center plans did.

While the average cost of these short-term service contracts was 16%, the percentages actually ranged from 8% to 40%. And because there were so many really expensive plans and a cluster very close to the average, we found that almost two-thirds of the offers were actually below 16%.

Figure 3
One- and Two-Year Service Contracts
Price of Service Contracts Offered
(as a percentage of game console price)

SquareTrade, with this product category, is not the low-cost provider at all. In fact, its service contract prices are scattered all over: at the low end, at the high end, and in between. There are only six SquareTrade data points in Figure 3 (two pair are on top of each other), but this trend is much clearer in Figure 4, which tracks the three-year plans. Unlike with TVs or laptops, not all the SquareTrade data here is in a small cluster below the average mark.

In fact, in Figure 4, SquareTrade has both the lowest and the highest data points. In the lower left corner is a blue square representing a $20 protection plan offered alongside a $249 Xbox One console. And then at the top of the chart, near the 30% mark, is a $100 service contract offered for a $350 Xbox One bundle.

Same Provider, Different Prices?

Even more shocking, both retailers work with SquareTrade, and of course both products are Xbox One consoles. In other words, they're protecting the same product, with the same quality, reliability, and predicted repair costs. Yet the same administrator came up with two very extreme prices for two different clients. We note, however, that the programs had two different insurance underwriters with different sets of actuaries, and that the QVC plan covers accidental damage while the Sam's Club plan does not. And, of course, we don't know what kind of a sales commission QVC is getting.

We'll get more deeply into the quirks of each administrator's pricing strategy at another time, once we've collected more data on appliances and other types of consumer products. But this illustrates a point that the critics of service contracts never seem to get: identical products, same administrators, different retailers, different prices for the same level of protection. So it pays to shop around, not only for the product or the bundle, but also for the protection plan.

Figure 4
Three-Year Service Contracts
Price of Service Contracts Offered
(as a percentage of game console price)

Because there are not as many really expensive service contract in this group, the number of prices over and under the average is more balanced. The average is 15%, and there are 15 product-protection pairs above that mark with 23 below it. The range is 8% to 29%, and the prices go from $20 to $140 (we priced a $500 PlayStation 4 bundle at QVC).

Four-Year Service Contracts

As with other product categories where risks are high, the administrators seem reluctant to write long contracts. There were no five-year service contracts found, and only 13 offers were for four years. And all 13 of them were offered alongside less expensive three-year contracts on Amazon.com, eBay, or Walmart.

For instance, Amazon.com offered a three-year plan for a $300 PlayStation for $36, next to a four-year plan for $53. Walmart wanted $28 for a three-year plan and $37 for a four-year plan, for either a Wii U or an Xbox One.

Besides being less common, the longer-term plans are also more similarly priced, at least when compared to the product they protect. In Figure 5 we can see that while the actual contract prices range from $37to $173 (from left to right), they equate to a percentage range of only 12% to 21% (from bottom to top).

Figure 5
Four-Year Service Contracts
Price of Service Contracts Offered
(as a percentage of game console price)

Still, across all the product-protection pairs, there seemed to be more range in the price of the protection than there was in the price of the product. We chose three game consoles that all sell around $300 in their base configuration. In fact, almost half the products we surveyed were selling within two dollars of $300. And while their selling prices can rise above that level because of extra disk space, additional controllers, bundled games, or other factors, the consoles are more or less the same. It's not like laptops, where you can have a hundred different permutations of hardware, so that no two units are the same.

The Price of Protection

Yet, as homogenous as the product families are, there's a tremendous amount of range between the top-priced service contracts and the bottom. For the PlayStation 4, the price of protection ranged from 8% to 33% of the selling price of the package. For the Xbox One, the range was 11% to 40%. And for the Wii U, it was 8% to 27%. For all products and all contracts, the average cost of protection was 16%.

One would think that the plans that include accidental damage coverage would be towards the top of those ranges. But of the 32 plans that include ADH, half were priced below 15% of the price of the product they protect. In fact, two of the ADH plans offered at Walmart were below 10%.

Then again, half of the $100-and-up plans included ADH. But the other half, found on eBay, did not include ADH. So it's not accurate to say that all the expensive plans include ADH. Nor is it accurate to say that the ADH plans are always more expensive.

And some of the terms and conditions are different in ways that impact repair cost or the lifetime cost of the contract. But we think the size of sales commissions is also a big factor, as is the basic question: do we break even or even lose money for the sake of the market share we gain, or do we make money?

Consumers, on the other side of these transactions, have to consider that sometimes these service contracts are underpriced, and sometimes they're overpriced. So if you're going to spend time looking for a $250 Xbox One or a bargain-priced PlayStation 4, you might as well look for a fairly-priced service contract that also covered accidental damage.